Fed cuts rate as world markets rebound

(CNN) -- The U.S. Federal Reserve cut a key short-term interest rate by three-quarters of a percentage point Tuesday.

The federal funds rate, an overnight bank lending rate that affects how much interest consumers pay on credit cards, home equity lines of credit and auto loans, was cut to 2.25 percent.

Reaction to the Fed announcement was initially tepid as investors were betting on a full 1 percent cut, but by the end of the day the Dow had risen another 200 points to close 420 up at 12393.

The Dow's climb was its biggest one-day point gain in more than five years.

The Nasdaq closed up 4.19 percent at 2268, and the S&P was 4.11 percent up at 1329.

"The market reaction was certainly positive after a little pullback," said Matt King, chief investment officer at Bell Investment Advisors. "It seems like they found the sweet spot with the decision today."

It is the sixth cut in the past six months and comes at a time when the Fed is trying to keep the U.S. economy from slipping into recession -- although many think it's already entered one.

Interest rate cuts are usually viewed as beneficial for the economy since they typically lead to more lending.

But some experts think lower rates won't solve the credit crunch paralyzing Wall Street. Others are worried the rate cuts will cause a continued weakening in the value of the dollar and a further spike in commodity prices

Europe's main stock markets also rebounded after sharp losses the previous day, with London's FTSE 100 index jumping 3.54 percent by 1700 GMT.

Elsewhere, Frankfurt's DAX 30 regained 3.41 percent to 6,393 points and in Paris the CAC 40 index was up 3.42 percent at 4,583 points.

These results followed mixed results in Asia on Tuesday, as anticipation grew over the U.S. central bank's predicted decision to cut rates in an effort to boost the ailing American economy.

But investors were given encouragement when Goldman Sachs, the world's largest investment bank, and Lehman Brothers on Tuesday beat Wall Street expectations with first-quarter earnings reports.

Goldman made $1.47 billion after preferred dividends, or $3.23 per share -- down from $3.2 billion, or $6.67 per share, last year, the Associated Press reported. Revenue fell to $8.33 billion from $12.73 billion a year earlier.

However, analysts polled by Thomson Financial had expected earnings of $2.58 per share on $7.47 billion in revenue, AP reported.

Goldman's shares climbed six percent to $160.05 in pre-market trading from a $151.02 close Monday, and Wall Street followed suit with the Dow Jones up 282.66 points, or 2.36 percent, to 12255 by 1700 GMT.

Lehman Brothers' net income for the quarter ending February 29 fell 57 percent to $489 million, or 81 cents per share -- above the forecast 72 cents per share, AP reported.

Its shares rose 18 percent to $37.31 in early Tuesday trading, while Goldman climbed further by 8.6 percent to $164.02.

Earlier, stock markets across Asia showed mixed results on Tuesday as Japan's Nikkei 225 closed up 176.65 points, or 1.5 percent, at 11,964.

Elsewhere, the Hang Seng closed up 300 point or 1.42 percent at 21,385.

However, other Asian stocks reversed earlier gains to fall 0.3 percent by mid-afternoon, Reuters.com reported.

Meanwhile gold -- which at times of crisis is regarded by investors as a safe haven -- opened at a bid price of $998.70 a troy ounce on Tuesday, down from $1009.70, but then climbed to $1,005.75 by midday trading, AP reported.

The dollar continued to fall against the euro, trading at $1.5821 in the morning on Tuesday, well below the record high of $1.5904 reached on Monday, but nevertheless above the $1.5731 it reached in New York later in the day, AP reported.

Oil which has risen sharply in recent months, gained Tuesday after losing more than $4 per barrel overnight, according to AP. It gained $1.57 to $107.25 a barrel in electronic trading by noon in Europe.

On Monday, markets across Asia and Europe suffered heavy losses as the fallout from the shock sale of Bear Sterns continued -- but Wall Street recovered most of its losses on a dramatic Monday.

Banking stocks made steep losses after Bear Sterns -- one of Wall Street's most venerable names -- was acquired for a pittance.

Engineered by the U.S. Federal Reserve, JPMorgan bought the investment bank for $2 a share, valuing the bank at $236 million -- compared to nearly $70 per share last week and a high last year of $159 per share.

The sale was rushed through to beat the opening bells in Asia but it didn't stop stocks from plummeting in Asia or Europe.

In Europe Monday, the FTSE 100 fell by 3.86 percent to 5,414 and the French CAC 40 fell to 4,431, losing 3.51 percent. The German Dax suffered most, dropping 4.18 percent to 6,182.

The European banking sector was particularly hard hit, with UBS -- whose stock has dipped 62 per cent in the last year -- down 13.9 percent, AP reported, while Credit Suisse fell 8.6 percent and Deutsche Bank dropped 4.3. E-mail to a friend

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